An increased GST will slow growth and worsen inequality

Posted by Andrew Leigh MP5sc on November 12, 2015

If an increased GST is the answer, then you're asking the wrong question

12 November 2015

Australia faces a number of serious economic challenges right now. We have growth running below trend and recently downgraded by the OECD. Growth has been steadily downgraded in every budget since the first Abbott-Turnbull budget. We have got inequality now running at a 75-year high. We have had a generation in which earnings have risen three times as fast for the top 10th as for the bottom 10th of income earners. We have got housing affordability increasingly pushing out of reach of average Australian households, with young families in Sydney now facing the prospect of median house prices at more than $1 million. These are big challenges for Australia and the GST at 15 per cent would make all of them worse.

Let us take growth. We have just seen Japan raise its consumption tax. What happened to that economy? It went into recession, just the same as what happened after Japan last pushed up its consumption tax. What would a GST rise do to inequality? Clearly it would make it worse. Even Tony Shepherd acknowledges that the GST is a heavily regressive tax. What would it do to housing affordability? It would certainly make that worse with the Housing Industry Association numbers suggesting that a 15 per cent GST would add tens of thousands of dollars to the cost of a new home or, it could well add to the cost of every mortgage—if the member for Wannon had his way of putting the GST on financial services.

If a 15 per cent GST is the answer, you are asking the wrong question. To sum up the 15 per cent GST in a single word, that word is 'apophony'. 'Apophony'? I hear you ask. Is that when a blinding flash of positive insight comes to you? No, that is an epiphany. An epiphany is when a clever blinding flash of positive insight comes to you. An 'apophony' is when an idea comes to you that is exactly wrong. And 'apophony' is an idea that strikes you on the head that you think is right but is in fact deeply wrong. That is what those opposite have given us. They have given us an answer to the wrong question for Australia because the GST is no more efficient than an income tax, contrary to what the Prime Minister has been saying.

The Prime Minister has been standing at the opposite dispatch box all week saying that the thing about a GST is more efficient than the income tax. But that is not what his rethink document says. His rethink document says that the excess burden, dead weight loss, of raising $5 through an income tax is $1. And the excess burden of raising $5 through a GST is also $1 so the GST, according to the government's own modelling, is no more efficient than income tax but it is certainly less equitable.

We know from NATSEM modelling, the shadow Treasurer has pointed out, that if you raise the GST to 15 per cent, it costs the top quintile three per cent of their disposable income, but it costs the bottom quintile seven per cent of their disposable income. We have heard those opposite say that is okay because there will be compensation. There cannot be compensation if the member for Cook is right and raising the GST is going to decrease the total tax burden or at least not increase it. Because if you do not increase the total tax burden, by definition, you are not giving compensation to those on fixed incomes. That means those on fixed incomes should be terrified when they hear the prospect of a 15 per cent GST because a 15 per cent GST and a lowering of the tax burden means that low- and middle-income earners will be slugged just as they were in the 2014 and 2015 budgets. A 15 per cent GST is an 'apophony' on this House and it should be opposed.

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Given that a high percentage of transactions are now electronic can a variable rate GST (varying weekly, say, with the current rate as a ceiling) be implemented as a demand management instrument?

In outline, the “headline” rate would remain at 10% but at the end of each week GST paying entities would be refunded some part of that based on a “current” rate (less than or equal to the headline rate) which would be adjusted weekly to manage demand (similar to how the RBA adjusts its target interest rate, but presumably with much more immediate effect). Implementation would involve crediting each account that has been debited by EFTPOS transactions during the week (and these credits must then be offset in BAS / IAS reconciliation for GST registered entities). EFTPOS payers without an associated ABN, TFN etc. get no refund, nor do cash payers.